US and European markets have begun the new week a subdued mood. But core global bond yields are showing some life, lower across the board while the USD is a tad softer too
Australian Markets Weekly: 28 November 2016
Rising oil prices from early this year and again from the middle of the year have been associated with rising medium-to-longer term US inflationary expectations (and indeed expectations globally).
Oil in the limelight
- Oil prices pulled back on Friday as markets start to question whether this Wednesday’s official OPEC meeting in Vienna will be able to agree to production cuts tentatively agreed to in September. Statements over the weekend cast cold water on the deal, with Saudi’s Oil Minister quoted in the Saudi press as saying that “we don’t have a single path …to cut production” and that prices will stabilize even without a supply cut.
- Even with a formal production cut at Wednesday’s meeting, there is uncertainty over whether such cuts would be implemented by OPEC members given current budgetary pressures and ongoing geopolitical tensions. Moreover, and in any event, US shale production will likely be the swing producer, taking up any slack from receding OPEC production and thereby capping any increase in oil prices; OPEC’s mooted cuts were designed to shift the oil price into a $55-60 range while the breakeven costs for US shale producers is estimated in the $40-50 range.
- Should oil prices soften, that would act as a headwind to emerging increases in inflationary expectations in recent months. Against oil, higher US wages and signs of bottoming industrial commodities will support yields. The fiscal stance of the incoming US Administration will also be key, though this will take longer to calibrate.
- The other geopolitical event this week is the Italian constitutional referendum on Sunday. Italian PM Renzi has said that a loss would see him stand down. Such a loss would enhance the prospects of Euro-sceptic political parties with the market also starting to think a little further ahead toward the French Presidential elections next April-May. The Austrian Presidential election is also this weekend, and although the post is largely ceremonial, it will be another important indication of voter sentiment.
- Local Capex (Thursday) and retail sales (Friday) to get the most interest this week. NAB expects a 2% decline in Q3 Capex, another soft domestic reading further risking an almost threadbare Q3 GDP model forecast of 0.1%. The October retail sales report will be an important signpost on the health of the consumer, coming after two better reads in August and September. NAB’s forecast is for a still fairly solid 0.4% m/m.
- In the US, the ISM Manufacturing and Non-farm payrolls – if within reasonable distance of consensus – should see the market continue to fully price in a hike from the Fed at its 13-14 December meeting. Nine more Fed speeches this week will also be noted for further confirmation of a December hike and the likely path of rates in 2017. NAB expects a hike from the Fed in December.
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